7z has open architecture, so it can support any new compression methods.
Now the following methods are integrated to 7z:

Method

Description

LZMA

Improved and optimized version of LZ77 algorithm

LZMA2

Improved version of LZMA

PPMD

Dmitry Shkarin's PPMdH with small changes

BCJ

Converter for 32-bit x86 executables

BCJ2

Converter for 32-bit x86 executables

BZip2

Standard BWT algorithm

Deflate

Standard LZ77-based algorithm

LZMA is default and general compression method of 7z format. The main features of LZMA method:

High compression ratio

Variable dictionary size (up to 4 GB)

Compressing speed: about 1 MB/s on 2 GHz CPU

Decompressing speed: about 10-20 MB/s on 2 GHz CPU

Small memory requirements for decompressing (depend from dictionary size)

Small code size for decompressing: about 5 KB

Supporting multi-threading and P4's hyper-threading

LZMA compression algorithm is very suitable for embedded applications.
LZMA is released under the terms of the GNU LGPL. LZMA is also
available under a proprietary license for those who can not use the GNU LGPL in
their code. If you want to use LZMA code, you can ask consultations,
custom code programming and required developer licenses
from page for support:
Send message to LZMA developer.
Check also information about LZMA SDK.

7-Zip also supports encryption with AES-256 algorithm.
This algorithm uses cipher key with length of 256 bits. To create that key 7-Zip
uses derivation function based on SHA-256 hash algorithm.
A key derivation function produces a derived key from text password defined by user.
For increasing the cost of exhaustive search for passwords 7-Zip uses big number
of iterations to produce cipher key from text password.

7z is a part of 7-Zip program distributed under the GNU LGPL.
You can download 7-Zip sources and binaries from Download Page.